Morning Report 10/25/12

Posted on October 25, 2012 by Brent Nyitray

Vital Statistics:

  Last Change Percent
S&P Futures  1413.5 8.2 0.58%
Eurostoxx Index 2500.1 9.5 0.38%
Oil (WTI) 86.63 0.9 1.05%
LIBOR 0.313 -0.001 -0.32%
US Dollar Index (DXY) 79.82 -0.091 -0.11%
10 Year Govt Bond Yield 1.84% 0.05%  
RPX Composite Real Estate Index 194.1 -0.1  

Markets are stronger this morning after a strong durable goods report and a good UK GDP number. Initial Jobless Claims came in at 369k and last week was revised upward to 392k.  Capital Goods orders were flat. We had a slew of decent earnings reports this morning, and Apple will report after the close. Bonds are getting clocked on the durable goods number, with the 10 year down a point and mortgages down 10 ticks.

The Chicago Fed National Activity Index came in flat, but the 3 month moving average is still negative, indicating the economy is growing below trend.  

The FOMC statement yesterday was more or less a rehash of the prior statement.  Bond Traders who were looking for the Fed to add Treasuries to the QE mix were disappointed. The Fed noted that household spending has been advancing, while growth in fixed business investment has slowed.  Today’s durable goods and capital goods reports bear that out.  

The global slowdown is causing another round of job cuts.  This time, it is more than just Wall Street as Ford, Dow Chemical, Colgate Palmolive, AMD, and HP are all cutting staff.  The number of announced job cuts in the last 2 months is the highest since 2010.

The government is going after Bank of America for the sins of Countrywide. Needless to say, the consumer groups are delighted.  Lenders warn that credit will become even tighter. Certainly the litigation risk will get passed onto borrowers through higher rates and fees. Barney Frank believes the government should lay off JP Morgan for the sins of Bear, and claims that the government asked BOA to buy Merrill, but not Countrywide.

Whatever happened to the San Bernardino eminent domain idea?  This was the plan that involved the county taking performing underwater mortgages from the banks and forgiving principal. It appears the firestorm of criticism has caused the county to quietly table the idea.

Speaking of foreclosures, ABC News has a depressing photo essay of the foreclosure crisis.

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Morning Report 10/24/12

Posted on October 24, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1411.8 5.0 0.36%
Eurostoxx Index 2489.5 11.6 0.47%
Oil (WTI) 86.67 0.0 0.00%
LIBOR 0.314 -0.001 -0.32%
US Dollar Index (DXY) 80.02 0.041 0.05%
10 Year Govt Bond Yield 1.77% 0.01%
RPX Composite Real Estate Index 194.1 0.3

Stock index futures are stronger this morning after yesterday’s rout. Dow Chemical reported better than expected earnings in spite of a leaked memo that said the company was considering laying off 5% of its workforce. Facebook surprised to the upside by cracking the code on monetizing mobile. Mortgage aps dropped 12% last week.  The Markit PMI (a predictor of the ISM PMI) came in light, but still improved from Sep. Bonds and MBS are down small.

The FOMC rate decision is scheduled for 2:15 EST.  Historically the Fed has tried to stay out of the way this close to the election – in fact, the last announcement on QE (Infinity) was pushing it.  Which means the smart bet is going to be that this is a non-event.  That said, the Street is expecting some change – where the Fed adds Treasuries to its QE mix – so there is the possibility of market movement, especially MBS versus Treasuries. I wouldn’t want to be floating going into that announcement.

The FHFA House Price Index rose .7% in August, and is up 4.7% YOY.  This index covers only conforming mortgages, so it is less noisy than Case-Schiller or Radar Logic.

Freddie Mac’s latest US Economic and Housing Market Outlook expects QEIII to spark a further pick-up in housing activity, noting that housing has turned from a headwind to a tailwind for the economy. They are forecasting $2 trillion in originations this year, followed by a 15-20 percent contraction in 2013 as the refi boom plays out. They do worry about the fiscal cliff taking 2 percentage points out of GDP, although Obama is playing cat and mouse with the defense budget cuts, as he says one thing in the debates “cuts will not happen” and his advisers walk back the comments afterward. Elmer Fudd is quite concerned about the fiscal cliff as well.

Finally, Rob Chrisman gives you the data dump from the MBA Conference in Chicago.  Originators are adding capacity, the CFPB wants a flat fee for all mortgage originations, and the Street gets ticked when clients have the gall to check multiple dealers in order to get the best price on their TBA transactions.

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Morning Report 10/23/12

Posted on October 23, 2012 by Brent Nyitray

Vital Statistics: 

  Last Change Percent
S&P Futures  1413.9 -16.2 -1.13%
Eurostoxx Index 2496.3 -34.9 -1.38%
Oil (WTI) 87.39 -1.3 -1.42%
LIBOR 0.315 -0.001 -0.16%
US Dollar Index (DXY) 79.85 0.202 0.25%
10 Year Govt Bond Yield 1.77% -0.04%  
RPX Composite Real Estate Index 193.9 -0.1  

Markets are lower this morning on earnings misses.  DuPont is down 5% pre-open after missing estimates badly.  Economic bulls will note that when late cyclicals like Dupont start reporting declines, that is usually an ominous sign for the expansion. UPS noted “uncertainty around the magnitude of the holiday shopping season.” Commodities are weaker as well.  Unsurprisingly, bonds and MBS are benefiting from the “risk off” trade. 

Today is another light day, economics wise, but tomorrow we get the FOMC announcement. The Street is looking for the Fed to broaden QEIII to include Treasuries.  Federal Reserve Bank of New York President William Dudley acknowledged in a recent speech that current policy “could distort asset allocations and lead to renewed financial asset bubbles. To date, there is little evidence of problems or excesses” Okay.  The 10-year is yielding 1.76%, below your stated inflation target of 2%. It makes you wonder where he would consider the 10-year to be in bubble territory.

Ever heard of “flopping?” It is the new scam where an underwater homeowner sabotages the resale value of a house in a short sale, which gets the bank to lower the asking price. The homeowner partners with a speculator who buys the property on the cheap, cleans it up, and flips it. The homeowner supposedly gets a piece of the action.

The Atlantic surveys the carnage of the lending industry from 2006 to the present.  3/4 of the biggest home lenders in 2006 no longer exist. I always thought the Super Bowl ad distribution is a tell – in the 2000 Super Bowl, the ads were dominated by dot coms.  In 2006, it was dominated by lenders. Hubris before the fall. Employment in the mortgage industry is roughly half of what it was at the height of the boom. Of course, now we have the opposite problem, with capacity constraints in the banking industry.  Of course regulatory uncertainty is playing a role, as Douglas Lebda of Lending Tree notes.

Is it really all just about price?  Financial and tech consulting firm Carlisle and Gallagher conducted a survey which revealed 34% of consumers are willing to pay more for a mortgage if it comes with superior customer service.  52% said they were willing to pay more to complete the mortgage process more easily. Note to Washington, only 23% of US consumers believe regulatory changes will have a positive impact on their next mortgage. 

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Morning Report 10/22/12

Posted on October 22, 2012 by Brent Nyitray

Vital Statistics: 

  Last Change Percent
S&P Futures  1426.5 2.5 0.18%
Eurostoxx Index 2544.6 2.4 0.09%
Oil (WTI) 90.51 0.5 0.51%
LIBOR 0.316 -0.002 -0.47%
US Dollar Index (DXY) 79.54 -0.083 -0.10%
10 Year Govt Bond Yield 1.81% 0.04%  
RPX Composite Real Estate Index 193.9 0.1  

Markets are up slightly in spite of weak guidance out of Caterpillar. CAT is forecasting a 5% decline in next year’s sales based on the weak global economy. This week is heavy with earnings reports with Dupont, Facebook, 3M, Coca Cola, Conoco, and Amazon.com. On the economic front, we will have the FOMC rate decision tomorrow and the first estimate of 3Q GDP on Thursday.  Bonds are down 25 ticks and MBS are down 6 or 7.

Mark Zandi of Moody’s is endorsing the the qualified mortgage rule. This rule should provide lenders some relief from litigation as long as the mortgage was underwritten in accordance with CFPB guidelines. As far as loans outside those guidelines?  They “will remain toxic water for most lenders.”

Many market participants are expecting the Fed to announce that treasuries will be included in future QE.  The Fed has already committed to buy $40 billion of MBS a month until unemployment is down and it surprised many observers by not including Treasuries in that statement. This caused MBS to rally way in excess of what the moves in the 10-year would predict.  In some ways, this would offset the buying that would be lost when Operation Twist ends this year.  Bank of America is predicting the Fed will buy $45 – $60 billion of Treasuries in addition to the $40 billion in MBS. 

Still, banks are understaffed as the volume of mortgage applications swells, where timelines are being stretched from the typical 45-days to 90. Banks undoubtedly believe that the current volume is being driven by refis, which they view as temporary.  The article goes on to say that mortgage rates to the consumer should be lower, but they do note the increase in guarantee fees. 

Ocwen and Walter Investment are teaming up to out-bid Nationstar for Rescap.  

The Bipartisan Policy Center is launching a Dodd-Frank initiative, where they try and do a “cost-benefits” analysis to Dodd-Frank. They frame it as a “stability vs growth” issue.

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Morning Report 10/19/12

Posted on October 19, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1448.5 -3.0 -0.21%
Eurostoxx Index 2548.0 -26.2 -1.02%
Oil (WTI) 92.29 0.2 0.21%
LIBOR 0.317 -0.002 -0.47%
US Dollar Index (DXY) 79.52 0.151 0.19%
10 Year Govt Bond Yield 1.81% -0.02%
RPX Composite Real Estate Index 193.8 0.1

Markets are weaker this morning after earnings misses from bellwethers Google, Microsoft, McDonalds, and GE.  Euro sovereign yields continue to decrease.  Bonds and MBS are up about 1/4 of a point.

The CFPB is starting to put some more meat on the bones with respect to a qualifying mortgage. Lenders would be protected from penalties if the borrower is given a prime rate and the back-end debt ratio doesn’t exceed 43%. The NAR has already weighed in saying that “any partial safe harbor would need to go much further to avoid harm to the mortgage market.”

The Mortgage Bankers Association has sent a letter regarding proposed Basel III rules. They correctly note that the penalties on mortgage servicing rights are going to create a problem. Add the proposed new servicing standards out of the CFPB, and you may in fact turn mortgage servicing into a business nobody wants to perform.

While institutional investors are raising money to get into the REO-to-rental businesses, one of the pioneers, hedge fund Och Ziff, is looking to cash out.  Turns out that renting properties on such a vast scale isn’t as profitable as it initially appears.

Today is the 25th anniversary of the Crash of 87. I think in some ways, we can trace the origins of the financial crisis to this event. During the crash, newly appointed Fed Chairman Alan Greenspan pledged the Federal Reserve would provide liquidity to anyone who needed it. At the time, it was probably the right thing to do, as it prevented the stock market crash from ballooning into something bigger.  I think the Chairman recognized its success and used it every time the financial markets had a hiccup – from the Mexican Peso Crisis, to Long Term Capital, to the Asian Crisis. This behavior became affectionately known as the “Greenspan Put,” which means that even if you screw up, the Fed will come to the rescue. This created a underpricing of risk, which laid the groundwork for the real estate bubble.  Real estate prices became unmoored from their traditional relationship with incomes around the year 2000, just as the stock market bubble was going critical, and continued to inflate as the Fed flooded the system with liquidity in the aftermath. And since the Fed is still doing the same thing in response to the burst real estate bubble, this time on steroids, the game continues..

 

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Morning Report 10/18/12

Posted on October 18, 2012 by Brent Nyitray

Vital Statistics:

  Last Change Percent
S&P Futures  1453.1 -4.0 -0.27%
Eurostoxx Index 2561.6 -8.2 -0.32%
Oil (WTI) 91.7 -0.4 -0.46%
LIBOR 0.319 -0.002 -0.62%
US Dollar Index (DXY) 79.14 0.120 0.15%
10 Year Govt Bond Yield 1.80% -0.02%  
RPX Composite Real Estate Index 193.7 0.5  

Markets are weaker on a weaker this morning ahead of the EU summit in Brussels. Euro sovereign yields continue to drop, which means the benign backdrop to the markets continues.  Earnings reports continue to exceed expectations, though the bar is set very low this quarter. Bonds and MBS are slightly higher. 

It turns out that last week’s dramatic drop in initial jobless claims was due to technical problems with seasonal adjustments in one state, as reported by CNBC.  Initial Jobless Claims increased to 388k from a revised 342k last week.

The Leading Economic Indicators had a big jump, up from -.4 to + .6,  We still seem to be oscillating around 0, with a positive reading followed by a negative one. This is indicative of a slow growth trend. 

Similarly, the Philly Fed Business Outlook Survey noted that conditions in the manufacturing sector remain weak. Labor conditions dropped as 22% of all firms reported decreases in employment and 11% reported increases. The average workweek dropped as well.  In terms of the mix of employees, more firms decreased the number of full-time employees and increased the number of temp workers. 

Prepare for a battle over the fiscal cliff. No tax hikes on the wealthy, no deal. Of course Obama has said that before.

The WSJ discusses yesterday’s big housing starts number. As the inventory of foreclosures declines and underwater sellers sense a turnaround in pricing, more and more buyers are looking to new construction.  Foreclosures as a percent of sales dropped to 14% in September, and are down from 50% a couple of years ago.

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Morning Report 10/17/12

Posted on October 17, 2012 by Brent Nyitray

Vital Statistics:

  Last Change Percent
S&P Futures  1453.8 4.6 0.32%
Eurostoxx Index 2557.0 9.1 0.36%
Oil (WTI) 92.48 0.4 0.42%
LIBOR 0.321 -0.004 -1.23%
US Dollar Index (DXY) 78.96 -0.444 -0.56%
10 Year Govt Bond Yield 1.77% 0.06%  
RPX Composite Real Estate Index 193.3 -0.1  

Markets are higher after a strong report on housing starts. The banks reported good numbers while the techs disappointed. Mortgage applications fell, while building permits came in well above expectations.  Signs of strength in housing are pushing yields higher on Treasuries and MBS

Housing starts were 872k in September a rise of 15% MOM and 35% YOY.  Proportionally, multi-family had the biggest increase, which speaks to the strength in the rental market. While this level is a 4 year high, it still is just about the same level as the nadirs following the 82-82 and 91-92 recessions.  So we have a long way to go to get back to “normalcy” which is around 1.5 million, but things seem to be picking up in the housing sector, which has been a major drag on the economy.

Will investors do the heavy lifting of shrinking the TBTF banks? Given languishing stock prices and large discounts to book value, shareholders will be pressuring the banks to exit marginal businesses and either sell them or spin them off to shareholders. For example, Citi’s investment banking division is about the size of Goldman Sachs. Goldman trades at an 11 multiple, while Morgan Stanley trades at a 30 multiple. It would make sense for Citi, which trades at a 9.7 P/E to spin off the investment bank, which should unlock shareholder value.  Maybe they could resurrect the old Salomon Brothers.

The WSJ was out with a story last night which said the CFPB is considering giving lenders safe harbor if they originate a qualified mortgage.  It sounds like this safe harbor wouldn’t insulate the banks from buyback risk, but it would insulate them from lawsuits and penalties from the government. If there isn’t any protection from buyback risk, I am not sure how much this would end up mattering in the end.

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Morning Report 10/16/12

Posted on October 16, 2012 by Brent Nyitray

Vital Statistics:

  Last Change Percent
S&P Futures  1442.5 7.0 0.49%
Eurostoxx Index 2527.9 42.8 1.72%
Oil (WTI) 91.98 0.1 0.14%
LIBOR 0.325 -0.006 -1.67%
US Dollar Index (DXY) 79.33 -0.413 -0.52%
10 Year Govt Bond Yield 1.71% 0.04%  
RPX Composite Real Estate Index 193.4 -0.7  

Markets are higher this morning after a slew of good earnings reports and a positive reading on German confidence. Vik Pandit has stepped down as CEO of Citigroup.  The Consumer Price Index (which officially does not matter anymore) came in as expected. Bonds and MBS are down.

Yet another article complaining that mortgage rates aren’t dropping enough in response to QE. At least this one mentions the increase in G-fees, though it implies that it is a minor reason. 

One way of handling the TBTF issue that is being bandied about is to place a cap on bank balance sheets as a percent of GDP. Ohio Democrat Sherrod Brown introduced a bill to cap liabilities at 2% of GDP which went nowhere (JPM has liabilities of 8% of GDP).  But now a Federal Reserve Governor has mentioned the idea as well.  He doesn’t mention a specific number though. 

The first time homebuyer may be coming back.

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Morning Report 10/15/12

Posted on October 15, 2012 by Brent Nyitray

Vital Statistics 

  Last Change Percent
S&P Futures  1429.1 7.6 0.53%
Eurostoxx Index 2498.5 29.5 1.19%
Oil (WTI) 91.96 0.1 0.11%
LIBOR 0.33 -0.004 -1.20%
US Dollar Index (DXY) 79.66 -0.007 -0.01%
10 Year Govt Bond Yield 1.68% 0.02%  
RPX Composite Real Estate Index 194.1 -0.3  

Markets are higher this morning on lower Chinese inflation.  Part of the recent strength (it seems like almost every day, the S&P futures are up 5 points pre-open) is being driven by the steady drop in Euro sovereign yields. Italy is trading below 5% and post-re-org Greek debt is trading at 17.5% after reaching 30% in late spring. Whether the crisis is over, or merely taking a breather is anyone’s guess. Of course there is the possibility of a hard landing in the emerging markets looming on the horizon.

On the economic news front, retail sales came in at 1.1%, and look even better when you strip out autos and gasoline. Maybe there was something to that University of Michigan consumer confidence number last Friday. It certainly bodes well for a good holiday season for the retailers. On the other hand, the NY Fed’s Empire Manufacturing Survey continued to decline.

Citigroup reported better than expected earnings, though it appears one-time items drove the results.  The Street is still refusing to give much credit to Citi’s turnaround – book value is $63.59 a share and the stock is trading at 35.25, up about a half.

The NY Times has another article discussing the problems with appraisals. Given that the real estate market has been slow for so many years, finding enough non-distressed comps is proving to be a problem.  Sellers who think they are lowballing their prices find that appraisals are coming in well below their offers.  Appraisers counter that they don’t set the market – they reflect it, and blaming appraisers for a lousy housing market is like blaming the weatherman for lousy weather.

Bob Schiller and Rick Santelli discuss ZIRP and housing. Santelli, no fan of ZIRP calls it “money for nothing” and believes that the message it sends (that the Fed is really worried about the next few years) is putting a damper on the animal spirits. Plus, as Schiller has pointed out, there isn’t a lot of evidence that mortgage rates explain house prices. 

Mark Zandi believes that the deleveraging process is largely over. Certainly debt service payments relative to income are at the lowest level in 20 years, courtesy of low interest rates.  Debt however, is not, although it is off the highs of 2007.

 

 

 

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Morning Report 10/12/12

Posted on October 12, 2012 by Brent Nyitray

Vital Statistics 

  Last Change Percent
S&P Futures  1433.4 5.0 0.35%
Eurostoxx Index 2492.4 5.3 0.21%
Oil (WTI) 92.14 0.1 0.08%
LIBOR 0.334 -0.006 -1.76%
US Dollar Index (DXY) 79.61 -0.161 -0.20%
10 Year Govt Bond Yield 1.68% 0.01%  
RPX Composite Real Estate Index 194.4 0.1  

Stocks are higher this morning after positive earnings out of JP Morgan and Wells Fargo. Mortgage banking drove revenues and profits. The Producer Price Index came in higher than expected, although it was lower ex-food and energy.  Bonds and MBS are flattish.

Was the debate last night market moving?  Of course not.  Best headline to sum it up:  GOP and Dems agree: Our guy won.

It turns out yesterday’s unexpectedly large drops in unemployment claims was due to a large state mistakenly reporting its claims.  

Frank Blake of the Home Despot sees a full blown housing recovery as a year or two away. He points to customer attitudes – do homeowners consider a home improvement as an investment to be recouped when the house is sold, or simply an expense.  I would agree – considering a granite countertop an “investment” is definitely bull-market thinking.

What is the role of the CFPB?  It was sold as an agency dedicated to more transparency and ensuring consumers are fully informed when making financial decisions.  But to the people that work there, the mission is to force financial service providers to give consumers a better deal. The Mortgage Bankers Association warns of unintended consequences.

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